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The change in the Trust year would allow the
contribution to be made in December of future years,
thus providing a permanent deferral of the related tax
liability. This change is necessary because the limit
on the addition to a qualified asset account is tested
at the Trust's year end. With the contribution in
December, a full year's funding could be made, and
therefore, the addition to asset account limits would
be satisfied (at November 30), and the deduction would
still fall within Square D's calendar year.
* * * * * * *
Conclusion
The delay in the enactment of the more stringent
funding requirements passed by the Tax Reform Act of
1984 has left open a window of opportunity that will be
closed on January 1, 1986. By accruing or actually
making a payment to the VEBA, Square D will be able to
accelerate a deduction which would otherwise be taken
in the following year. Continuing this funding pattern
in future years will allow Square D in essence to
receive a permanent deferral of tax on the amount.
An internal memorandum dated December 17, 1985, from D.S. Free to
D. E. Wilson and J. M. Vetta states:
The Tax Department has proposed that the Trust adopt a
fiscal taxable year ending November 30th in order to
avoid the new limitation on pre-funding of the Trust.
Because the limit on additions to the Trust's reserves
is tested at the Trust's year end, the fiscal year
would allow the Trust to meet the test as of November
30th, which means Square D could pre-fund its entire
liability for the following year in December of the
current year.
Pre-funding of the Trust will allow Square D to
accelerate the recognition, for tax purposes only, of
$36,500,000 of 1986 expenses into 1985. Assuming the
Company's contributions to the Trust do not decline in
future years, we will have deferred payment of
$18,250,000 of taxes permanently. If tax reform
legislation produces a corporate tax decrease, this
plan will also produce a permanent tax benefit.
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Last modified: May 25, 2011